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Pay-What-You-Want Pricing and Charitable Giving

Prosocial Behavior Research: Winter 2011 Column

In this quarter’s column, we explore “shared social responsibility” — the idea of companies working in tandem with charities and customers to support socially beneficial causes.

One way this can work is illuminated in a recent study co-authored by Leif Nelson, an associate professor of marketing at the Haas School of Business at UC Berkeley. Nelson and his colleagues have shown that when customers are allowed to pay what they want for a purchase, and — this is key — when they simultaneously know a portion of their money will go to a specific charity, they offer substantially more than they would without the involvement of the charity.

It turns out that just offering a product at a fixed price and telling customers that a certain percentage of their purchase will go to the charity doesn’t stimulate as many sales — and therefore doesn’t raise as much money as hoped. Yet this is the most common charitable promotion consumers see.

Interestingly, the study reveals that letting people pay what they want, combined with a promise that some will go to charity, produces even more profit than selling them a product at a regular, fixed price — whether that price has a charity offer attached to it or not. It also produces a surplus that can go to the charity itself. This type of co-participatory pricing scheme, then, is an ingenious way of stimulating both philanthropic giving and increased sales — a win-win for everyone.

In the paper, “Shared Social Responsibility: A Field Experiment in Pay-What-You-Want Pricing and Charitable Giving,” published in Science magazine in July 2010, Nelson and co-authors from the UC San Diego Rady School of Management and Disney Research describe an experiment conducted at a popular rollercoaster in a large amusement park. There, action photos are taken of visitors while they are on the ride and are then offered to them for sale.

The researchers observed customer behavior under four conditions: 1) when photos were offered at the regular price of $12.95; 2) when photos were offered at $12.95 with the added information that half would go to charity; 3) when photos were offered for whatever price the customer wanted to pay (including nothing); and 4) when photos were offered at pay-what-you-want pricing with the added information that half their money would go to a popular patient-support organization.

Of 28,224 riders who saw the photo priced at the regular $12.95, only a tiny half a percent of them purchased the item, yielding a small profit of about 6 cents per visitor. Slightly more people paid that price when they learned that half of it would go to the charity, yielding a profit of about 7 cents per visitor. So the charitable component increased demand, but only slightly.

Under pay-what-you-want pricing, many more people bought the photo — 8.4 percent, but they paid only about 92 cents each, slightly less than the cost of production. This resulted in a slight loss.

The results get interesting when pay-what-you-want pricing was combined with information that half the customer’s money would go to the charitable partner. About 4.5 percent of riders chose to purchase a photo, a figure that was lower than without the charitable partner, but substantially higher than for either of the fixed price conditions. The crucial change was in the price they chose to pay: Whereas riders under strict pay-what-you-want pricing had paid only 92 cents, when it was combined with charity, they paid an average of $5.33. Overall, this produced a profit of nearly 20 cents per visitor compared to the 6 cents observed at the standard price. For a ride that attracts more than 15,000 people a day, that difference is enormous.

Once again, letting customers pay what they want when they know a significant portion of their money is going to a good cause not only generates the most profit for the company — it also generates the most donations for a charity.

The study points to the strong possibility that pay-what-you-want pricing can be a viable pricing and social responsibility strategy for companies. It plays off people’s tendency to be a little more generous when it comes to charitable giving. The key ingredient in stimulating their willingness to give significantly seems to be the element of choice in the process of donating. Indeed, the authors suggest that giving customers even more choice — allowing them to designate a charity of their own choice, for example — might yield even greater results.

In short, creating opportunities for what Nelson and his co-authors call “shared social responsibility” — among companies, charities, and customers — may provide the sustainability component that is often lacking in current corporate social responsibility strategies. Certainly it will stimulate prosocial behavior.

- Frank Flynn, Professor of Organizational Behavior, The Hank McKinnell-Pfizer Inc. Director of the Center for Leadership Development and Research